Microeconomics - Chapter 2: Economic Models, Trade-Offs & Trade

What is an economic model?

A simplified representation of reality used to analyze and predict outcomes.

What does ceteris paribus mean?

“All other things equal” — hold other factors constant to isolate one variable’s effect.

What does the PPF (Production Possibilities Frontier) show?

Possible combinations of two goods, efficiency, inefficiency, and impossibility.

What is the slope of the PPF equal to?

The opportunity cost of producing one good in terms of the other.

What causes the PPF to shift outward (economic growth)?

Better technology, more resources, or improved education/labor.

What is absolute advantage?

Producing more of a good with the same amount of resources.

What is comparative advantage?

Producing a good at a lower opportunity cost than someone else.

Why is comparative advantage the basis of trade?

Because countries benefit from specializing in goods with lower opportunity costs and trading.

What are terms of trade?

The agreed trade ratio, which must lie between both parties’ opportunity costs for both to benefit.

What is the difference between positive and normative economics?

Positive = describes what is (facts). Normative = prescribes what should be (value judgments).